Day 230 The RBA monetary policy effectiveness

The RBA monetary policy effectiveness

As the Greece Debt Crisis fluctuated the world economy, and Australia was indirectly affected through the connections with China and U.S.. As we can observe from the table, the Reserve Bank Australia (RBA) has been continuously reducing the target cash rate from 2011. This expansionary monetary policy was aiming to carry the Australian economy out from its downturn. However, in our perspective, the policy seems quite ineffective on economy stimulation, even though the target cash rate has been successfully reached. In fact, the low interest rate did perform part of its role on spending aggregation. For example, the GDP growth rate was brought back to 4 percent, and the import increase 5.6 percent on 2014. Besides that, our export and private investment still showed a downward trend, and the household consumption growth dropped to 4.1% in 2015. There were several factors that hindering the effective expansionary policy implication. First of all, the mining boom has ended, suggested by the total private investment growth. This made the total demand of funds from the business sector dropped, hence the investment expenditure was shrinking. In addition, the EDC substantially affected the Chinese economy, which tremendously hurt Australian’s export to China (majorly iron ores and other minerals). Therefore, the net export was unstable as well. Moreover, the low interest rate did not provide much stimulation over households' spending. The recession on Australian business cycle and the global economy fluctuation caused a high unemployment rate, which increased individual’s precautionary need to hold money, instead of spend it. Furthermore, the cutting interest rate provided speculative opportunities on the real-estate market. The property price in Sydney and Melbourne was skyrocketing, which created another bubble. In fact, the APRA had to pass new regulations to raise the residential investment loan rate.

In conclusion, the expansionary monetary policy aggregated the expenditure in a less effective manner, due to the factors we discussed above.